Why Are Rents Rising?

Rents, like most housing costs, are simply a function of supply and demand. When supply of apartments and rental homes is high and demand is weak, rents fall. Conversely, when supply is tight and demand is strong, rents rise. At the local level, rents and housing values tend to rise in tandem.  A hot housing market is usually the sign of a local economic boom, with new jobs created and more families moving to town to fill them. Demand also encourages investors and developers to build more capacity. What does that mean in practice? Right now, we’re in the final years of one of the greatest apartment booms in recent history. Driving the new construction is a shortage of rental capacity. Last year the national vacancy rate dipped to .6%, its lowest point in nearly 20 years. As a result, rents rose at a 3.2% rate last year—twice the pace of overall, according to the Joint Center for Housing Studies. Over the past five years the average US monthly rent has climbed 14%—double the rate of home price appreciation. Rents rose 3.5% last year according to Zillow, which forecasts another 3.5% hike this year. Meanwhile, the real estate brokerage CBRE expects that on a national basis, rents go up another 3.0% in 2016 and 2.7% in 2017. How does that impact the future? When it comes to building new apartments, providing the supply to meet the booming demand doesn’t occur overnight. The masses of foreclosures from 2009 to 2012 provided about 4 million homes that were converted into rentals by investors, without which, rents would be even higher than they are. The number of single-family rental homes has increased 35% since 2006, to 15.1 million from 11.2 million in 2006. Of course, building big new apartment buildings takes serious capital and time. Only now are developers responding to demand with massive new investments in multifamily housing. Since 2006, some 2.9 million new apartment units have opened and The National Association of Home Builders is forecasting that 719,000 more will be ready by the end of next year. The multifamily boom will increase capacity in most major markets so much that some data services report vacancy rates are falling already. Forecasters expect rent increases to follow suit and decline to the inflation rate or below. By 2017, CBRE expects vacancy rates to reach 5.3 percent, the highest level since 2011. To keep vacancy rates down, landlords will begin to offer one month of free rent to attract new tenants. When will it affect me? While construction in Chicago, San Francisco and New York City may peak this year, the boom in apartment construction has yet to peak in hot markets like Denver, Houston, Boston and Washington, and could extend into next year.